HMRC Tax Arrears: How to Deal With Them

What can you actually do if you owe HMRC money for VAT, PAYE etc?

Every limited company has a responsibility to keep up with their tax payments to HM Revenue and Customs in order to conduct a legal and viable business, but sometimes these taxes can build into an unmanageable amount. Rick Smith takes a look at what you can do if this is the case.

Overview of HMRC taxes

From the outset there are a few core types of tax that are essential for companies to pay, these are:

• Corporation tax – a percentage of the business’ profits.
• PAYE (Pay as You Earn) – a percentage of employees income.
• National Insurance – deduction from employees’ income to fund state benefits such as the NHS.
• VAT (Value Added Tax) – this is the tax on consumption of goods, although Capital Allowances may apply on more expensive items, on which the VAT can be spread against company profits over a number of years.

If a company is unable to pay these taxes, they build up the aforementioned HMRC tax arrears (money owed to HM Revenue and Customs), these could result in financial penalties and possibly legal action if they continue to go unpaid.

However, there are several ways to deal with these arrears in order to avoid these penalties and ensure that your business can continue to trade…

Download our FREE guide to dealing with HMRC Arrears

1.     Act as early as possible

If only one VAT payment has been missed, it is advisable to act as quickly as possible to avoid various knock-on effects to your business. If the bill is cleared with HMRC within 12 months of its due date, no extra fine is accrued.

On the other hand, in cases where previous action has being taken, VAT surcharges are increased, and the company’s annual turnover will be effected.

You can find out further information about late VAT payments on the gov.uk website.

2.    Pay your arrears if at all possible

If your business has enough cash to pay its HMRC arrears, you should deal with them as soon as possible to prevent accumulating fines.

For example, if your VAT or PAYE balances remain unpaid they will accrue interest, particularly if payments have been late in the past.

3.    A LOC (line of credit) can be used to pay HMRC arrears

If your business simply doesn’t have enough cash to pay what is owed to HMRC, one option is to use a LOC.

This is a loan from the bank which may only be used for a specific purpose, and is slightly different to a typical bank loan due to the fact that interest is only paid on the amount of money that is withdrawn.

An LOC is usually secured by a business asset to lower the interest rates on the money borrowed.

Using a LOC is not often advised, but in some cases where HMRC is beginning to become aggressive in its attempts to recover money, this may be the most effective way of allowing you some breathing space.

In circumstances where the director of a business doesn’t want to effect the end of year balance sheet liabilities, invoice factoring or discounting may be a more viable option to raise funds quickly.

4.    A CVA (Company Voluntary Arrangement) may be the best option

In situations where HMRC arrears have been accumulated it is likely that money is also owed to the business’s other creditors.

At a point where it has been established that these debts cannot be paid and the company is therefore insolvent, a CVA could be proposed.

CVAs create an agreement between the company and its creditors, resulting in an environment in which none of the creditors are able to chase you for payment or propose a ‘winding up’ of the business.

This option relieves the pressure on a company, but is only possible if the firm has significant financial problems and is not solvent.

5.    Personal finances could be used

In cases where the business is trading well and, while suffering a temporary cash flow set back, are still viable, one option could be to inject your own personal funds (or additional funds from investors) into the company in order to pay the HMRC arrears.

Where this is possible, it can be a quick way of returning the business to a profitable position and ensure stable operations. However, this is obviously not always an option, as a significant cash reserve is required.

Also, directors should be very careful about using their own funds; should the company eventually fail they are likely to leave themselves personally liable for the company’s debt when using this method. We’d recommend this option only when it is certain the company is in good health.

6.    A TTP (Time to Pay) arrangement could be negotiated

It is important to remember that while HM Revenue and Customs can become aggressive when trying to recover debts, ultimately they want your company to succeed and would prefer your tax payments to be paid off rather than your company ceasing to trade.

If the business is struggling to pay the full amount as a bulk sum, you may be able to propose a Time To Pay Arrangement and are likely to be given 6-12 months to pay the arrears in instalments that are agreed with HMRC.

This option reduces the pressure of the debt by spreading it along a viable timeline but won’t reduce the amount of money you need to pay.

7.    Administration may be the best option

In the case of a business that is insolvent (unable to pay the debts it owes) and has no access to emergency funds, entering the company into administration may be the best way forward while leaving the possibility of a turnaround.

This path prevents the company being liable to legal action, as a third party is appointed to manage the company in the interest of its creditors.

This process can be expensive but often, when managed in the correct way, it can ultimately save the company a substantial amount of money.

Next steps

If you are struggling with HMRC tax arrears there are things that can be done if you act early enough! The best thing to do is call us now on 0800 975 0380 for some free, confidential advice. We will be able to discuss the options available to you and determine the most appropriate step for your company. With offices across the UK, you’re never far away from expert and confidential advice.

You can also find out more about how we can help you deal with HMRC tax arrears